Employee Rights When Employer Goes Bankrupt In Canada

Bankruptcy and Severance Pay: A Guide to Employee Rights in Canada

When a company declares bankruptcy in Canada, it creates a ripple effect that extends to its employees. This article will delve into the intricacies of bankruptcy and severance pay, and what rights employees have when their employer goes bankrupt.

Understanding Bankruptcy

Bankruptcy is a formal legal process governed by the Bankruptcy and Insolvency Act (BIA). When a company files for bankruptcy, its assets are liquidated, and the proceeds are used to pay off its debts (source).

Types of Creditors

In the context of bankruptcy, there are two types of creditors:

  1. Secured creditors: These creditors have a claim over the company’s assets. They are typically lenders who have provided a loan against a specific asset.
  2. Unsecured creditors: These creditors do not have a specific claim over the company’s assets. Employees fall into this category.

Secured creditors are given priority when the liquidation proceeds are distributed, leaving unsecured creditors, including employees, at the bottom of the pecking order.

Employees as Unsecured Creditors

As unsecured creditors, employees are typically last in line to receive any payments from the liquidation proceeds. This includes unpaid wages, severance pay, and other benefits. In many cases, there is little to no money left for unsecured creditors once the secured creditors have been paid.

Claiming Damages

Employees are generally barred from suing their bankrupt employer for wrongful dismissal. Instead, they must file a claim with the bankruptcy trustee, who is responsible for distributing the liquidation proceeds.

The BIA does provide some protection for employees by converting a portion of their unpaid wages into a secured debt, up to a maximum of $2,000 (source).

Wage Earner Protection Program (WEPP)

The Canadian government has implemented a program known as the Wage Earner Protection Program (WEPP) to help employees of bankrupt companies. The WEPP provides payments to employees for unpaid wages, severance pay, and other benefits, up to a certain limit (source).

Legal Challenges

While it is technically possible for employees to sue the directors of a bankrupt company for unpaid wages, this is often a complex and challenging process. There are numerous legal issues involved, and it is recommended that employees seek legal advice before pursuing this route (source 1, source 2).


Bankruptcy can be a difficult and confusing time for employees. Not only do they face the loss of their job, but they may also struggle to recover unpaid wages, severance pay, and other benefits. However, by understanding their rights and the resources available to them, employees can navigate this challenging situation more effectively.

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